What is Working Capital

Part of the balance sheet, a working capital forecast is essential for any business plan. A working capital forecast in deficit can lead to insolvency.

What is Working Capital

Net current assets is the difference between cash and core trading assets such as accounts receivable and stock that are cash convertible within one year less all debt repayments, also within one year. 

That in turn describes working capital, which measures balance sheet liquidity.

For that reason, it is important that when producing forecasts using Figurewizard that the balance sheet does not show net current assets in deficit. That would otherwise result in forecasting that the company is expected to become unable to pay its bills on time from some point in the year ahead.   

To check out how to make those changes to forecasts quickly, easily and in real time, take a look at Figurewizard's What-If Calculator /  Planner.

Current Assets

When producing profit and cash flow forecasts using Figurewizard, an analysis of forecast assets and liabilities both current and long term is generated.

Current assets represent cash and cash convertible assets arising from core trading activity such as accounts receivable and stock that can reasonably be expected to be turned into cash within twelve months.

Other current assets will represent prepayments; for example for insurance premiums, deposits and prepaid letters of credit which have not yet been satisfied. 

Current Liabilities

Current liabilities on the other hand are all debts falling due for payment within twelve months, regardless of whether or not they have been incurred in the pursuit of trade.

These will include payments due to suppliers of goods, services and overheads, VAT, corporation tax, bank overdrafts (payable on demand), asset finance repayments and other loans.

All represent a charge to working capital.

Financing Short Term Working Capital Deficits

The problem with using borrowings to cover cash flow shortfalls is that they cannot be allowed to become a long term habit. External finance is strictly a temporary expedient, not a cure.

However where seasonal businesses are concerned there may well be a month or more during the quiet time of the trading year when working capital may not be able to deliver sufficient cash flow to pay the bills the bills on time.

Managing Monthly Net Cash Flow (Including Financing)

When forecasting and planning your business using Figurewizard it is always important to check for monthy cashflow deficits which can be found in the monthly cash flow, bank and finance budget.

If that indicates some months to be in deficit it will important to revise the business plan, including the level of short term borowings such as the bank overdraft or other loans in order to eliminate them.

The What-If Calculator and Planner is ideal for this and for all of the other key elements of your forecasts.

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